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[PODCAST] US Open Rundown 9th August 2019

  • European indices are firmly in negative territory [Euro Stoxx 50 -1.0%], as the mixed Asia-Pac handover fizzled out
  • BTPs, FTSE MIB and Italian Banks are under significant pressure as recent reports indicate League Party are to present a no-confidence motion in the Government
  • UK GDP Prelim QQ Q2 -0.2% vs. Exp. 0.0%, after which Sterling touched multi-year lows at 1.2080
  • Looking ahead, highlights include, include US PPI, Canadian Building Permits & Jobs Data

ASIA-PAC

Asian equity markets traded mostly higher as the region got a mild tailwind from the strong performance on Wall St where stocks extended their rebound, helped by the recent better than expected Chinese trade data and continued PBoC restraint on the CNY. As such, ASX 200 (+0.3%) and Nikkei 225 (+0.5%) were higher with notable strength seen in tech stocks after similar gains in the sector stateside and with investors in Tokyo cheering better than expected GDP data, although weakness in real estate and profit taking in gold miners has limited the upside for Australia. Elsewhere, Hang Seng (-0.7%) and Shanghai Comp. (-0.7%) were choppy with initial support seen after the PBoC once again set a firmer than expected reference rate but with gains later pared after participants digested mixed inflation data in which CPI topped estimates but PPI contracted, while reports the US held off on the decision regarding Huawei licences after China stopped agricultural purchases, added to the cautiousness. Finally, 10yr JGBs were higher as they track upside in T-notes and as prices broke through prior at 154.50/55, with the BoJ also present in the market under its bond buying program in which it upped purchases in 1-3yr JGBs but lowered purchases of 3-5yr and 10-25yr maturities.

PBoC skipped open market operations and are net neutral for the week vs. last week's CNY 50bln net drain. (Newswires) PBoC set CNY mid-point at 7.0136 vs. Exp. 7.0222 (Prev. 7.0039)

US delayed the decision regarding Huawei licenses following China’s suspension of agricultural purchases. (Newswires)

Chinese CPI (Jul) Y/Y 2.8% vs. Exp. 2.7% (Prev. 2.7%). Chinese PPI (Jul) Y/Y -0.3% vs. Exp. -0.1% (Prev. 0.0%)

Japanese GDP (Q2 P) 0.4% vs. Exp. 0.1% (Prev. 0.6%). Japanese GDP (Q2 P) Y/Y 1.8% vs. Exp. 0.4% (Prev. 2.2%)

China Q2 prelim current account surplus USD 57bln; H1 surplus USD 106bln; a small 2019 current account surplus is expected, according to FX regulator. (Newswires)

GEOPOLITICS

US Defence Secretary Esper has asked South Korea to send troops to the Strait of Hormuz. (Newswires)

Iranian Foreign Ministry spokesperson says any Israel involvement in any maritime coalition in the Gulf is a "clear threat" to national security, which Iran has a right to confront the threat. (Newswires)

UK/EU

UK Opposition Labour leader Corbyn has written to Cabinet Secretary Sedwill expressing his concern regarding the potential for PM Johnson to use the fact that parliament is dissolved 25 days prior to a general election as a means to push a no-deal Brexit through during such a period. (BBC)

Italy's League Party to present in the Senate a no-confident motion in the government, adds that elections must be held quickly, according to a statement. Italian Deputy PM Salvini reportedly said the League are ready for a confidence vote as soon as next week. While, Italian President Mattarella reportedly may seek 'Guarantee' government before Monday's confidence vote, according to Corriere della Sera (Newswires)

UK GDP Prelim QQ Q2 -0.2% Exp. 0.0% (Prev. 0.5%); first quarterly contraction since 2012

- UK GDP Prelim YY Q2 1.2% vs. Exp. 1.4% (Prev. 1.8%)

- ONS: “GDP contracted in the second quarter for the first time since 2012 after robust growth in the first quarter. Manufacturing output fell back after a strong start to the year, with production brought forward ahead of the UK’s original departure date from the EU"

EQUITIES

Major European indices have diverted from their Asia-Pac counterparts largely positive performance and opened and remain in negative territory [Euro Stoxx 50 -1.0%]. The FTSE MIB (-2.2%) is the notable underperformer this morning as the Italian political turmoil has escalated following comments from League’s Salvini that there is no longer a majority of support for the government and elections are necessary (a summary of the situation is available on the headline feed). The MIB’s underperformance is most significantly driven by banking names with the likes of UniCredit (-6.0%), UBI Banca (-6.0%) and Banco BPM (-8.3%) experiencing significant losses; as such, the FTSE MIB Banking Index is lagging (-4.4%) with the largest weighted bank in the Stoxx 600 Bank index (-1.5%), Intesa Sanpaolo (-4.5%), with a 3.8% weighting likely the most significant laggard out of Italy in terms of index points. Elsewhere, the DAX (-0.6%) did get a short-lived boost from a Bayer (+3.2%) update, where reported indicate the Co. are to propose up to a USD 8bln roundup settlement; which generated a significant spike in Co. shares from around EUR 63.50 to EUR 70.00 at best. DAX aside, this morning’s notable movers to the upside largely reside in the FTSE 100 (-0.2%), with WPP (+7.3%) topping the index higher post earnings where the Co. proposed an interim dividend of GBP 0.0266 and H1 net revenue came in above the prior. Sticking with the UK, but outside of the 100 are Hikma Pharmaceuticals (+6.8%) as the Co’s H1 revenue also came in above prior and additionally the Co. increased some FY guidance components.

Tesla (TSLA) - Elon Musk tweets that CO's software V10 is looking really good, will be releasing to early access list soon. (Twitter)

FX

GBP/EUR - The Pound has come under renewed pressure on the back of an unexpected, but not exactly shocking negative UK GDP print for Q2, while monthly IP and output data also missed expectations. However, Cable has dipped below the 1.2080 multi-year base and Eur/Gbp has just crossed yesterday’s 2 year high at 0.9265. given the single currency’s separate struggles in wake of more Italian political instability. Indeed, Eur/Usd remains capped around 1.1200 after the collapse of Rome’s 2-party coalition, and ahead of a confidence vote before fresh elections potentially in October or November, while circa 1 bn option expiries at the big figure and from 1.1175-60 may also keep the headline pair in check into Friday’s NY cut.

JPY/CHF/NZD/AUD/CAD - All mildly firmer against the Greenback, albeit well within this week’s ranges and for the Yen that means largely anchored on 106.00 as Fib resistance just above (106.06) continues to be respected on a closing basis, while decent expiry interest between 105.90-106.00 could stall pull-backs towards 105.50. Meanwhile, the Franc has rebounded through 0.9750 and 1.0900 vs the Euro on the aforementioned renewed political uncertainty in Italy and the Antipodean Dollars are still clawing back post-RBNZ declines vs their US counterpart even though RBA comments and the SOMP overnight have underscored clear downside economic risks that will likely require further monetary, or perhaps even unconventional easing. Hence, Aud/Usd looks vulnerable above 0.6800 and Nzd/Usd just shy of 0.6500 as the Aussie/Kiwi cross pivots 1.0500. Turning to the Loonie, looming Canadian jobs and to a lesser extent perhaps housing data should provide some independent impetus as crude prices essentially tread water approaching the end of a volatile week and the DXY stays close to 97.5000. Usd/Cad currently trading towards the base of 1.3245-15 parameters.

NOK/SEK - The Scandi Crowns are flat-lining against the Euro after some relatively big swings so far this week, with Eur/Nok and Eur/Sek meandering between 9.9955-9665 and 10.7475-7070 respectively and neither really reacting to data as Norwegian inflation metrics and Swedish household consumption updates were both somewhat mixed.

EM - Broad losses vs the Buck as the overall risk tone sours again and specific bearish factors persist, while the Lira has also been subject to fresh reports about more Government interference at the CBRT (at least 9 senior personnel ‘given’ new roles, according to the FT). Elsewhere, the Yuan continues to weaken after another seemingly off-radar incrementally higher PBoC Usd/Cny mid-point fix (at 7.0136).

At least nine senior figures at the CBRT, including the chief economist, Hakan Kara, were told on Thursday that they were being moved to other roles, according to two people familiar with the matter. (FT)

RBA Governor Lowe said Australian economy is to expand 2.5% this year in which the downward revision reflects weak consumption growth but added he expects quarterly GDP growth to increase gradually and suggested the economy may have reached a "gentle turning point", while he suggested fiscal option should be on the table if demand weakens and that monetary policy has a role to play but would like other options explored. Furthermore, Governor Lowe said they are prepared to use unconventional policy if warranted and that it is possible we head to zero lower bound, although he hopes it can be avoided and added that unconventional policy in Australia is unlikely. (Newswires)

RBA Statement on Monetary Policy reiterated that the board is prepared to ease policy if needed and are observing the labour market, while it added that it is reasonable to expect extended period of low rates, that near-term risks are more to the downside and that economic forecasts include technical assumption rates will move in line with market pricing of a cut to 0.75% by year-end and to 0.5% in H1 next year. RBA lowered GDP growth forecast for Dec. 2019 to 2.50% from 2.75%, maintained Dec. 2020 forecast at 2.75% and raised June 2021 forecast to 3.00% from 2.75%, while it sees underlying inflation for Dec. 2019 at 1.50% (Prev. 1.75%), Dec, 2020 at 1.75% (Prev. 2.00%) and for June 2021 at 2.00% (Prev. 2.00%). (Newswires)

Notable FX Option Expiries:

- EUR/USD: 1.1100 (570M), 1.1160-75 (1B), 1.1200 (975M), 1.1245-50 (550M)

- USDJPY: 105.90-106.00 (1.3B), 106.90-107.00 (700M), 107.25 (420M)

FIXED INCOME

UK debt looks set to extend post-UK data gains from 134.43 currently and further outpace Bunds that have lost some momentum, but the big bond story of the session so far in terms of price action remains political and prompted by the collapse of Rome’s coalition Government. Indeed, the 10 Italian benchmark has now been as low as 137.13 (-288 ticks on the day) and the corresponding yield up over 1.80% at one stage as investors await confirmation of a vote of no confidence that could come later today. Meanwhile, US Treasuries are shadowing moves in core counterparts and the curve has flipped back into bull-flattening mode after the final leg of this week’s auction remit saw long bonds received more warmly than 10s overall, and with PPI data to come.

COMMODITIES

WTI and Brent futures are firmer in early EU trade, albeit the benchmarks have far to go to retrace this week’s losses. The ramp up of US-China trade tensions saw the global benchmark slump to a current weekly low of 55.90/bbl (vs. 61.40/bbl weekly open), whilst WTI found a weekly base at 50.55/bbl (vs. 55.29/bbl weekly open). The former currently eyes 53/bbl (200 WMA 53.05/bbl) to the upside whilst the latter climbs closer towards 58/bbl (200 WMA at 57.76/bbl) . The oil demand outlook has been deteriorating with IEA the latest agency to cut its global demand growth forecast, by 100k BPD to 1.1mln BPD and 2020 by 50k BPD to 1.3mln BPD. The release is relatively in-fitting with EIA’s STEO earlier in the week, where it cut 2019 world oil demand growth forecast by 70k BPD to 1.0mln BPD, but raised its 2020 forecast by 30k BPD to 1.43mln BPD. Prices may also see support from the Saudi’s intention for intervention to stem the decline in the market, although official measures have not been announced. Elsewhere, a stellar week for gold as the yellow metal was bolstered as investors flocked to the safe-haven amid the aforementioned ramp up in protectionism. Spot gold has a current weekly (and 6-year) high of 1510/oz (vs. 1440/oz at the weekly open). BAML Flow Show notes that precious metals have reaped inflows of USD 2.3bln, its fourth largest weekly inflows to date. Meanwhile, copper prices are flat around the USD 2.6/lb level amid the cautious risk tone ahead of US’ market entrance. Sticking with base metals, iron ore prices continue to decline with the metal down 18% thus far this month amid a bleaker short-term demand outlook with steel mills potentially reducing operations on low profitability, whilst exports from Brazil and Australia continue to rise. The Reserve Bank of Australia, at its SoMP, also noted that iron oreprices are “expected to decline further” as supply gradually comes back online and China demand moderates. Finally, nickel prices continue to be supported by the speculation that Indonesia could reel in an export ban on nickel ore in a regulatory move. Indonesia initially planned to ban exporting nickel ore by 2022 in an attempt to build up its manufacturing base by using its raw resources. The country said that no decision has been made on the mineral ore export ban timing but bringing the deadline forward from 2022 will disrupt USD 4bln in ore exports.

CME raised Comex 5000 silver futures margins for August by 13.9% to USD 4100 per contract. (Newswires) ICE is raising margin requirements for ICE Futures US Oil Contract, effective from the close of business on August 12th and which will be reflected in margin calls made the next day. (ICE)

Indonesia says no decision has been on the mineral ore export ban timing but bringing the deadline forward from 2022 will disrupt USD 4bln ore exports. (Newswires)

Russian Energy Ministry says the possibility of slower global oil demand was taken into account when taking the decision to extend OPEC+ output deal. (Newswires)

IEA Monthly Report: cuts 2019 oil demand growth estimate by 100k bpd to 1.1mln bpd and cuts 2020 by 50k bpd to 1.3mln bpd. (Newswires)

- Global oil demand fell 160k bpd Y/Y in May

- Global oil supply held steady in July above 100mln bpd, but fell beneath year earlier levels for the first time since November 2017

- Iranian oil production fell 500k bpd in July to 2.23mln bpd; lowest since 1908's. Iranian oil exports fell 130k bpd in July to 400k bpd

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Busy week ahead, via Danske: https://t.co/AN4oC6jgiD